EScroogeJr (< 20)

Confession of a housing bull

5

Now, I've been bullish on housing for many months. I've been bullish when sales prices posted their first decline since the Great Depression. I've been bullish when the CDO market collapsed. I've been bullish when dozens of builders from the top 200 went belly up and when analysts were predicting more bancruptcies ahead. I remained bullish even when the Case-Schiller index showed an unprecedented year-on-year decline of 11%.

But everything has its limit. The housing recession goes unabated. Foreclosures are surging, and nothing can stop this process. And despite all efforts to reinflate the bubble, property values continue to fall like a rock. One part of being a good investor is the willingness to recognize past mistakes. I can no longer keep ignoring the excellent arguments presented by floridabuilder, DemonDoug, dwot, QualityPicks, TMFBent, devoish, alstry and many others. It's time to admit my losses and move on.

The market has been kind to builders lately. We've had another short covering rally that has provided us with a good exit point. Heck, even some of my Caps picks are now in the green! It's time to remember the old adage: both bulls and bears make money, but hogs get slaughtered.

I am closing all my housing picks in Caps and real life. Some of my picks might remain on my scorecard for a few more days to see if this dead cat bounce will let me lock in a good accuracy score, but strategically, I am going to exit this sector by the end of next week.

I express my gratitude to all those whose critical comments helped me get a better grasp of the real situation in the housing industry and made me realize that I was barking at the wrong tree.

How ironic that you are selling the sector as I am buying. Let me share my rational for buying. First is value. My investment analysis is based on present value of future cash flows and parts of the finance and building supply sectors look good to me. I try to stay away from subprime exposure and excessive leverage.

Second, timing of real estate ebbs and flows look good to me. Don't get me wrong, I don't claim to have a crystal ball and the market could have a lot more downside, but residential real estate in that portion of the market that experiences winter picks up in the spring and drops off when school starts.

The portion of the country that has no winter, is a different matter. A huge bubble was formed in Sun Belt cities from the country of California to the retirement mecca of Florida. Las Vegas, Phoenix, and cities in the South East built bubbles of varying size. The bigger the bubble, the more drop in price before recovery.

For some reason, the builders do seem to go up constantly. I think the investors are failing to see one obvious and simple point. Past performance is NOT indicative of future behavior. Do the wallstreeters expect the builders to have breakoput years again? Housing is dead, we will need to wait at least 5 years until housing finds a foothold. If we look at past abhorences of housing markets, this one by all means goes deeper and further. Plus, these homebuilders are becmoing inventory holding places. Even the fed is promoting going against them. Part of their plan is to encourage the local governments to buy up all the remaining abandoned homes at the price the underlying CDOs are priced at, which would be on average at about 80% of the supposed value. That means the counties and cities, which will then have to turn around and get rid of them will have to sell them. Homebuilders prices need to go down, and the new plan will make sure of that. SO then a few questions loom in mind about that.

#1 Wouldnt the profit margins be cut drastically?

#2 Wouldnt it be harder to sell a hone when right accross the block I can pick one up for a song?

#3 Expecially one the same builders built during the bubble?

I want to keep the underperform on housing even though its killing me, but hey how can I prove to myself I am right or wrong about my suspicion unless I let it ride out?

I can't BEAR the thought.............It is okay to be realistically optimistic. In long run we are all dead, and housing will make a comeback someday. If I woke up every day believeing half of what the bloggers say, I would never get out of bed to figure out a way to sale a home. Yes, even in hell's foreclosure kitchen, we are able to make a few sales. We just have to take our lumps for now and figure a way to get through the pain. It's not going to be easy, but what really is?